US states forecast highest tax revenue in 5 years

U.S. states expect to collect higher tax revenues in the coming budget year that combined would top pre-recession levels, according to a survey released Tuesday. The increase could reduce pressure on states to cut budgets and lay off workers.

A slowly healing job market and modest growth have boosted sales and income taxes, which provide nearly three-quarters of state revenue. Overall corporate income taxes are also growing.

Still, many states continue to struggle with budget shortfalls. And some states, such as California, are seeing greater revenues only after raising taxes to stem deficits.

Total state spending would increase only 2.2 percent and remain below pre-recession levels, the report said.

“The thing we’re definitely seeing is stability,” said Scott Pattison, executive director of the budget officers’ group. Only eight states were forced to close unexpected mid-year budget gaps this year, he said, compared to 39 states two years ago.

Arizona, Ohio and Michigan are anticipating some of the biggest increase in tax revenue next year.

Michigan has already benefited from higher revenues. Last year the state had its first surplus in a decade. That enabled state officials in February to cancel plans to require 37,000 state workers to take four days of unpaid leave.

In Ohio, tax revenue is projected to rise to $17.6 billion next year. That’s an 8.6 percent increase from the current budget year. Democrats in the state legislature have responded by pushing for more school funding. GOP Gov. John Kasich has downplayed the improved forecast, saying year-to-date tax receipts are only modestly above estimates.

Others states are seeing less improvement. Iowa, Illinois and Arkansas are among those forecasting small increases.

And even though California is forecasting much higher revenue, much of that is coming from a tax increase. The state is struggling to close a $16 billion budget deficit and is considering cutting programs.

So are many other states. Aid from the federal government is dropping and the demand for health care, education and other services is rising.

About a quarter of the expected gain in revenue comes from proposed tax hikes in 10 states. Fifteen states recommended tax cuts, though not enough to offset the proposed gains.

The gains in revenue are also uneven. Tax receipts in 23 states are projected to remain lower than they were five years ago. The forecasts are based on proposed budgets submitted by governors.

The issue of state and local government job cuts inflamed the presidential campaign last week. President Barack Obama on Friday urged Republicans in Congress to approve legislation he has proposed that would enable more teachers and police officers to keep their jobs.

The president also asserted that the “private sector is doing fine,” which drew quick, derisive criticism from Republicans. Mitt Romney, GOP presidential nominee, charged that Obama was “out of touch.”

Layoffs are slowing at the state level. State governments added an average of 3,000 jobs per month in the past six months, after cutting an average of 5,200 in the preceding six months. Still, the cuts aren’t entirely over: states cut 5,000 jobs in May.

The biggest layoffs have been at the local level, particularly in public schools. Local governments rely on property taxes, which are still declining as property values fall in the wake of the housing bust.

Since August 2008, when state and local government employment peaked, local governments have cut 528,000 jobs. State governments have shed 134,000.

Even as tax receipts at the state level have recovered, states are facing greater demand for services. That means budgets will remain tight and hiring isn’t likely to pick up.

Dan Crippen, executive director of the NGA, said high unemployment is forcing millions of people to join or remain on Medicaid, the joint federal-state health care program for the poor. That’s placing big demands on states, which boosted Medicaid spending 20 percent this year.

“We’re not seeing the rolls drop off as much as you might expect,” Crippen said. And states expect to spend more on K-12 education next year, he added.

Medicaid will cover 5.6 million more people this year than in 2008, according to the Center for Budget and Policy Priorities, a liberal research group. States will also have to educate 350,000 more K-12 students and 1.7 million college and university students, the center estimates.